By: Damien Strohmier, CPA, CCIFP

Eligibility criteria for the second draw loans includes terminology that misled several companies to believe they were not eligible to apply. This article will review the eligibility requirements and specifically review the 25% reduction in gross receipts test that has been frequently misinterpreted.

Employee Threshold

For a borrower to be eligible for a second draw loan, the borrower must have fewer than 300 employees (down from 500).

Loan Amount

In addition, the total amount of a second draw loan is limited up to $2,000,000.

25% Reduction in Gross Receipts

To qualify for a second draw loan, a company must certify a 25% reduction in gross receipts.

What does 25% reduction in gross receipts mean?
This is a 25% reduction in your company’s revenue. Many companies approached this requirement with the understanding that it was referencing actual cash receipts. Cash receipts might be the right answer if you are a cash basis business. However, most contractors are on the accrual basis of accounting and use percentage of completion for the long-term contracts. The appropriate measurement for any company is the basis of accounting they typically use.

When must the 25% reduction in gross receipts occur?
First, check your annual revenues for 2020 and compare them to 2019. If there was a 25% reduction, your company would qualify to apply for a second draw. This is because if there was a 25% reduction for the whole year, then you must have had at least one quarter with a more than 25% reduction.

Next, if you don’t satisfy this for the year, you can review each individual quarter in 2020 as compared to 2019 and if any quarter compared to the same quarter in the previous year experienced a 25% reduction in revenue, your company would meet this requirement.

Exclusions from Second Draw

Finally, specific exclusions were also added for companies who are publicly traded, engaged in lobbying, receive a Live Venue Grant, or have significant operations in affiliation with China or Hong Kong (organized under, members of the board, so on). These are not likely to be the situation for contractor clients.

Further Clarification 

It is important to clarify that businesses do not have to wait for forgiveness of the first loan obligation prior to applying for the second draw. Additionally, if you have a small business that hasn’t been able to make the gross receipts determination, you are not required to make the certification at the time of applying, if your loan amount is under $150,000. However, this certification will be required in the forgiveness application.

There are additional considerations to review as your company pursues a second draw loan and we encourage you to reach out to your local Blue & Co. advisor to not only make the proper determination of eligibility but also to maximize the potential funding received under the program.